Trade secret agreements going far beyond the traditional agreement

In the past two weeks I have reviewed two different trade secret agreements which go far beyond the traditional agreement. Both were drafted by California law firms. It is perhaps a bit ironic that California firms drafted these agreements because in California, non-compete agreements are non-enforceable. But the new trade secrets agreements operate as a permanent non-compete agreement.

An employee who has recently left a job should not share the secrets that were learned from the former employer. In fact, we don’t even need trade secret agreements to prevent that from occurring. All the states have enacted laws consistent with the Uniform Trade Secrets Act that protect trade secrets. Nonetheless, it is quite ordinary, typical, and reasonable for an employer to have a policy that prohibits its secrets from being disclosed. Sometimes the language identifying what constitutes a trade secret is very clear and specific. Usually, however, it is a laundry list that undoubtedly includes things that aren’t actually secret.

What is disturbing, is the use of a trade secret policy as a permanent non-compete agreement. A normal trade secret agreement seeks to prevent a person from sharing secrets with a competitor, or anyone else. Imagine a Coca-Cola formula laboratory chemist going to work for Pepsi. It seems almost impossible that the job of developing new soda pop recipes can be performed without using the knowledge in one’s head – acquired from a prior job developing soda pop recipes. Does the competitive interest that Coca-Cola has prevent that chemist from ever working for Pepsi? Regardless of the argument that Coca-Cola may have in this imaginative hypothetical, I am now seeing automotive sales executives facing demands that they not work for any competitor or any customer forever. This is simply ridiculous. Trade secrets law and non-competition law both exist as limitations on the free market of labor, but trade secrets law exists to protect genuine trade secrets. Capitalism depends on the free movement of labor – anyone with a passing familiarity of Adam Smith or of Neo-Classical economics theory recognizes this.

As non-compete agreements are enforced more vigorously throughout the Midwest, one issue that I have seen repeatedly, is the downward pressure on wages. Suppose you are a sales executive and you work for a company that sells equipment in an aspect of the automotive industry; for instance, seating. You can probably get a job as a sales executive in the automotive industry that is not in seating. For you to earn your highest salary, however, you would need another job selling seats. If you have a non-compete agreement that prevents you from working for a company that sells seats, then you may only be able to leave your position to work for another company at a lower salary. You are not likely to do this, even if you are not happy and if you feel that your employer is not paying you as much as you are worth. If you don’t have a non-compete agreement, you can get a competing offer from another seat manufacturer and either take the new offer or use it to negotiate a pay increase from your current employer. I predict that as trade secret agreements become more widely used to effectively serve as non-compete agreements, we will see downward pressure on wages in a variety of industries.

In a tight enough labor market, employees who are well educated about this issue will refuse to accept jobs with non-compete or expansive trade secret agreements. In several states however, employers simply provide the non-compete or the trade secret agreement after the person has accepted the position with other paperwork on their first day on the job.

What’s the takeaway?

When you are accepting a position, ask for a copy of any non-compete or trade secret agreement you will be asked to sign before you take the job. Get it reviewed by experienced counsel.